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Online purchases and state use taxes

Most countries by now have some sort of consumption tax. In the United States, this is a state-level tax collected at the retailing point, a sales tax applied in most states. This intention is to apply the sales tax to the state's residents, not its retailers. Purchases made in other states need thus to be taxed in some way, and this is typically done in the annual income tax return by filing a use tax form. Very few people keep track of their cross-state purchases, and even fewer comply with the filing. Does the same apply to online purchases?

James Alm and Mikhail Melnik use data from eBay and find that 94% of all purchases are cross-state. What they should do is compare this with the probability that a purchaser who does not take into account the state of sale. With such a random matching, my rapid calculations give 95.7% (I included the District of Columbia). Thus 94% indicates that eBay buyers do have a preference for the home state, unlike what the authors state. A missed opportunity for the authors who then make a strange statement: "The average state online contribution is 1.66 percent of all purchases on eBay.com." I could have sworn that there are 50 states, and thus each one's average contribution would be 2%.

The paper does not get better after that. We learn that the correlation between state population and sale volume is close to one. One somewhat interesting number is the share of sales tax potentially attributable to eBay, 0.43%. That number is an extrapolation from the consumer electronics sales on a single day in 2007, thus quite uncertain (also because the same sales tax rates was used for all states). The author claim this number is small. When you consider that eBay represents one eighth of online sales, revenue from use tax should be about 3.3% of sales tax revenue. Not negligible. But Alm and Melnik do not bother looking up actual use tax revenue. Too bad.

People do not want a cashless society

With the technology available today, we would be ready to switch to a cashless economy. While having every transaction recorded in some way may trigger some privacy issues, imagine how easy it would be to keep records, file taxes, avoid theft, and how difficult tax evasion would become. So are we ready?

No, argue Naoki Wakamori and Angelika Welte, and it is not because merchants are holding back. Household still hold on dearly to cash, at least for small transactions. Indeed, the Bank of Canada conducted three years ago a survey on payment methods. One can use its data to estimate a model of payment method choices, then run a counterfactual experiment where card payments would be available universally. Wakamori and Welte find that cash usage barely changes. This means that households have a strong preference for using cash. Younger generations, though appear to be more ready to use debit or credit cards, so a cashless society may still lie ahead.

Feldstein on the Romney Tax Plan

Marty runs some numbers.

Updates: The TPC responds to Marty, and Marty responds to his critics.

The impact of irrigation on democratization

There is a large variety of institutions and cultures around the world, and I find it fascinating to understand how they originated. The literature has shown that some of them have origins that go back very far, possibly all the way to the introduction of agriculture (Example 1 and example 2)

Jeanet Sinding Bentzen, Nicolai Kaarsen and Asger Moll Wingender discuss how irrigation has influenced the arrival of democracy, and in fact prevented it. They point out that this is not a story about irrigated versus rain-fed agriculture, but rather of areas where there was potential for irrigation versus the others. The story is as follows. Irrigation requires large investments and control of water sources, and allows the extraction of substantial rents. This is a perfect environment for a despot. This theory was advanced by Wittfogel in Oriental Despotism and was soundly criticized. But Sinding Bentzen, Kaarsen and Moll Wingender confirm that the theory holds water empirically. The fact that irrigation potential is crucial allows to avoid the reverse causality issue, as geographic factors are presumably exogenous to institutions, at least until man started having an impact on climate. What is fascinating is that this still has an impact today on the prevalence of democracy.

A Tax Level Cheat Sheet

A nice summary from Keith Hennessey:

Over the past 50 years federal taxes have averaged 18% of GDP.

Governor Romney proposes taxes “between 18 and 19 percent” of GDP.

The House-passed (“Ryan”) budget proposes long-term taxes of 19% of GDP.

President Obama’s budget proposes long-term taxes at 20% of GDP.

The Bowles-Simpson plan proposes long-term taxes at 21% of GDP.

What makes the wife happier?

The flexible margin in a household's labor supply is usually the wife. As long as the husband has a decent income, the decision to work for the wife can then hinge on more than strictly economic factors, such as finding it more satisfying to work or not to work. Everyone is different in this regard, yet there may be some aggregate trends that may help us better understand the female labor supply as well as what can improve the population's well-being.

Edsel Beja finds that women are generally just as happy being a housewife or a working wife. But there are subtleties once you look closer at the data from the World Values Survey. In middle-income countries, there is a clear ranking in satisfaction: part-time work is best, housewife second, and full-time work is last. This should contribute to the realization that work is not an all-or-nothing decision, and that flexible work schedules can be very much appreciated.